Bringing Indian Railways into service tax net will help organisation's finances

September, 18th 2012

Indian Railways (IR) is supposed to charge service tax on rail users from next month.

However, railway minister and Trinamool Congress leader Mukul Roy is said to be resisting the plan. He should not. The IR is a very large service provider and the case for bringing it under the tax net is compelling.

It will complete the Centre's value-added tax (Cenvat) chain, ensure a smooth transition to the goods and service tax (GST) and also improve the Railways' own financial health.

The burden on rail users will be marginal due to an abatement of 70%. This means service tax will be charged only on 30% of the passenger fare and freight tariff. Only passengers travelling in air-conditioned coaches would have to pay the tax.

True, most passengers, barring those who travel on business, have to bear an extra burden, even if nominal. However, movers of goods will get credit for the tax paid and this can be offset against other input taxes borne by them.

Similarly, the Railways will also be able to gain input tax credit of around Rs 1,200 crore in the first year. So, Mukul Roy must shun populism as these gains will help boost the sagging finances of IR.

Another argument against the levy is that the IR would need more time to put systems in place for generating invoices to process Cenvat claims. That is absurd, given that the plan to bring Railways under the service tax net has been in the works for some years now.

Ideally, all services must be taxed, except those specified in the negative list, which has decisively been kept small. And then, it should be integrated into GST.

Now that the Centre has specified a negative list of services, the Railways should comply. Exemptions distort the tax structure and kill the spirit of simplification that has been the hallmark of indirect tax reforms.

It is appalling that revenues from service tax account for less than 1% of GDP, though services contribute to some 60% of GDP. To raise the share, all exempted groups should come into mainstream ahead of GST.

The Railways transport some 20% of all freight, and if this generates an audit trail, it would help complete the tax network. The Railways cannot sabotage India's GST.